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Chapter 14: 14-2SE (page 769)

Question: Classifying items on the statement of cash flows Cash flow items

must be categorized into one of four categories. Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

a. Cash purchase of merchandise inventory

b. Cash payment of dividends

c. Cash receipt from the collection of long-term notes receivable

d. Cash payment for income taxes

e. Purchase of equipment in exchange for notes payable

f. Cash receipt from the sale of land

g. Cash received from borrowing money

h. Cash receipt for interest income

i. Cash receipt from the issuance of common stock

j. Cash payment of salaries

Short Answer

Expert verified

Answer

  1. Operating (O)
  2. Financing (F)
  3. Investing (I)
  4. Operating (O)
  5. Non-cash (N)
  6. Investing (I)
  7. Financing (F)
  8. Operating (O)
  9. Financing (F)
  10. Operating (O)

Step by step solution

01

Explanation for operating activities

Transaction

Activity

Explanation

a.Cash purchase of merchandise inventory

Operating

Purchase of inventory in the course of business is an operating activity.

d.Cash payment for income taxes

Operating

Income tax is payable on the net income of the organization. Net income is a result of operating activities hence, payment of income tax is also an operating activity.

h.Cash receipt for interest income

Operating

There is no separate account for interest income therefore, it is credited in the statement of profit and loss and become part of operating activity.

j.Cash payment of salaries

Operating

There is no separate account for salaries and wages therefore, it is credited in the statement of profit and loss and become part of operating activity. Also, payment to employees is a day-to-day activity so it is an operating activity.

02

Explanation for investing activities

Transaction

Activity

Explanation

c.Cash receipt from the collection of long-term notes receivable

Investing

Long-term notes receivable is a long-term asset hence Cash receipt from the collection of long-term notes receivable is an investing activity.

f.Cash receipt from the sale of land

Investing

Purchase of land is an investment. So, when the land is sold cash receipt from such sale is an investing activity.

03

Explanation for investing activities

Transaction

Activity

Explanation

b.Cash payment of dividends

Financing

Dividend is paid to the common stockholders. Hence, it is a financing activity

g. Cash received from borrowing money

Financing

Cash is borrowed for funding business therefore, it is a financing activity.

i. Cash receipt from the issuance of common stock

Financing

Issuance of common stock is a financing activity.

04

Explanation for non-cash activities

Transaction

Activity

Explanation

e. Purchase of equipment in exchange for notes payable

Non-cash

Purchase of equipment in exchange for notes payable does not involve cash therefore, it is classified as non-cash transaction.

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Most popular questions from this chapter

Question: Preparing the statement of cash flows—direct method The income statement and additional data of Value Corporation follow:

  1. Collections from customers are \(13,000 more than sales.
  2. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
  3. Payments to suppliers are the sum of cost of goods sold plus advertising expense.
  4. Payments to employees are \)3,000 more than salaries expense.
  5. Cash payment for the acquisition of plant assets is \(102,000.
  6. Cash receipts from sale of land total \)29,000.
  7. Cash receipts from issuance of common stock total \(38,000.
  8. Payment of long-term notes payable is \)10,000.
  9. Payment of dividends is \(9,000.
  10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000.

Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct method.

Preparing a statement of cash flows using the direct method Jelly Bean, Inc. began 2018 with cash of \(58,000. During the year, Jelly Bean earned revenue of \)595,000 and collected \(614,000 from customers.Expenses for the year totaled \)427,000, of which Jelly Bean paid \(212,000 in cash to suppliers and \)205,000 in cash to employees. Jelly Bean also paid \(148,000 to purchase equipment and a cash dividend of \)57,000 to its stockholders during 2018. Prepare the company’s statement of cash flows for the year ended December 31, 2018. Format operating activities by the direct method.

Accountants for Benson, Inc. have assembled the following data for the year ended December 31, 2018:

2018 2017 Current Assets: Cash \( 105,100 \) 18,000 Accounts Receivable 64,400 68,900 Merchandise Inventory 86,000 82,000 Current Liabilities: Accounts Payable 58,000 56,100 Income Tax Payable 14,700 16,900

Transaction Data for 2018:

Issuance of common stock for cash \( 37,000

Payment of notes payable \) 47,100

Depreciation expense 24,000

Payment of cash dividends 53,000

Purchase of equipment with cash 69,000

Issuance of notes payable to borrow cash 68,000

Acquisition of land by issuing long-term notes payable 123,000

Gain on sale of building 4,500

Book value of building sold 61,000

Net income 66,000

Prepare Benson’s statement of cash flows using the indirect method. Include an accompanying schedule of non-cash investing and financing activities

Preparing the statement of cash flows—indirect method The income statement of Boost Plus, Inc. follows: Gross Profit Net Sales Revenue Cost of Goods Sold Salaries Expense 137,000 94,000 3,000 56,000 \( 54,000 81,000 Depreciation Expense––Plant Assets Net Income Before Income Taxes Income Tax Expense Net Income Total Operating Expenses 27,000 \) 53,000 BOOST PLUS, INC. Income Statement Year Ended September 30, 2018 Operating Expenses: \( 231,000 Additional data follow: a. Acquisition of plant assets is \)124,000. Of this amount, \(108,000 is paid in cash and \)16,000 by signing a note payable. b. Cash receipt from sale of land totals \(20,000. There was no gain or loss. c. Cash receipts from issuance of common stock total \)36,000. d. Payment of notes payable is \(15,000. e. Payment of dividends is \)5,000. f. From the balance sheet: September 30 2018 2017 Cash \( 39,000 \) 13,000 Accounts Receivable 46,000 61,000 Merchandise Inventory 94,000 88,000 Land 82,000 102,000 Plant Assets 214,000 90,000 Accumulated Depreciation (61,000) (34,000) Accounts Payable 32,000 15,000 Accrued Liabilities 12,000 20,000 Notes Payable (long-term) 16,000 15,000 Common Stock, no par 40,000 4,000 Retained Earnings 314,000 266,000 Prepare Boost Plus’s statement of cash flows for the year ended September 30, 2018, using the indirect method. Include a separate section for non-cash investing and financing activities

Using a spreadsheet to complete the statement of cash flows— indirect method

Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is recorded in the transaction analysis columns of the spreadsheet.

  1. Net income
  2. Increases in current assets (other than Cash)
  3. Decreases in current liabilities
  4. Cash payment for acquisition of plant assets
  5. Cash receipt from issuance of common stock
  6. Depreciation expense

Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the spreadsheet
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